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4. Common Law Claims
Plaintiffs have also tested common law recovery theories against clearing firms. In Riggs v. Schappell, 939 F. Supp. 321 (D.N.J. 1996), the plaintiffs asserted vicarious liability claims against the clearing firms predicated upon theories of respondeat superior and apparent authority with respect to the introducing broker's alleged Section 10(b) liability. Common law negligence claims were also brought against the clearing firms for their alleged failure to investigate properly the introducing broker before accepting it and thereafter failing to monitor its customer dealings. The court emphasized that agency law required a showing that the clearing firms as principals did something to cause the plaintiffs reasonably to believe that the introducing broker was acting on the clearing firms' behalf. The court then analyzed Third Circuit opinions on the issue of whether as a matter of federal securities policy, Section 20(a) provides an exclusive remedy that would foreclose vicarious liability claims under common law agency principles. Noting division among the circuits on that issue, the court observed that its own circuit permitted common law recovery theories in cases " . . . of compelling circumstances which evinces an intent by the principal to cause reliance by a third party on individual investment decisions," id. at 327. The court then dismissed the vicarious liability claims against the clearing firms, as there was no allegation that the firms had directly communicated with the plaintiffs or had had any direct role in the plaintiffs' investment decision-making process given the firms' ministerial functions.
The plaintiffs fared equally poorly on their negligence claims, as they failed to articulate any duty arising from the clearing relationship, statutory responsibility or industry custom or practice. The gist of the common law negligence claim was that the clearing firms had failed to supervise and monitor the introducing firm's activities, thereby proximately injuring the plaintiffs. Subsumed in these allegations was the contention that the defendants failed to investigate properly the introducing broker before accepting it for clearing functions. Citing cases discussed earlier in this article, the court determined that no broad fiduciary duty existed between the clearing broker and the customer which would support a negligence action. The court also rejected the proposition that liability could result if a clearing firm failed to refuse clearing functions to a statutorily disqualified introducing broker pursuant to federal securities laws. Furthermore, the court determined that there was no congressional intent to create a private right of action for investors in instances where a clearing agency fails to enforce its own rules and consequently, violates regulatory provisions. Riggs is noteworthy for its observation that because clearing firm relationships are ex contractu, there is no civil liability for a firm's failure to investigate its introducing broker ahead of time.
Common law fraud claims are also utilized in clearing firm cases, as evidenced by Blech I and Blech III. The District Court's dismissal of the fraud claim in Blech I was not unexpected. The plaintiffs had alleged that Bear Stearns' chairman had misrepresented that Blech was not experiencing financial difficulties. Even so, their purchases of the allegedly manipulated securities predated that statement. Accordingly, even if made, the misrepresentation would not have induced those trades, id. at 1295. A contrary result occurred in Blech III, where the court denied Bear Stearns' Rule 12(b)(6) motion on the amended fraud claim. The court determined that the plaintiffs' allegations - that Bear Stearns directly and knowingly participated in a market manipulation scheme that injured them - were sufficient to state a fraud claim under New York common law, id. at 586.
In re Lloyd Securities, Inc., 1992 Bankr. LEXIS 1706 (E.D. Pa. 1992), held that Newbridge, the clearing firm, was duty-bound to safeguard customer funds. The trustee contended that Lloyd Securities, the introducing broker, had unlawfully converted customer account funds by causing Newbridge to issue withdrawal checks payable to Lloyd's customers, which the Lloyd principals then intercepted in batched overnight pouches and endorsed with obvious forgeries which Newbridge thereafter negotiated. To reach its result, the court focused upon the contractual duties undertaken by Newbridge in its clearing and customer agreements, pertinent NYSE and NASD business conduct standards, Newbridge's internal procedures and bailment law: " . . . within its relationships with the respective customers of the Debtor, Newbridge at all times maintained a duty to safeguard the funds and securities of the individual customers," id. at 40.
The court's holding emanated from Newbridge's direct conduct separate and distinct from Lloyd's misappropriations. Citing Carlson and Stander, supra, the court did in fact agree that Newbridge should have no broad duty to supervise introducing brokers nor be liable for their investment decisions. Yet, the court distinguished those cases from the facts at hand: "However, this conclusion does not preclude Newbridge's being liable to the customers on account of its own poor decisions made in the course of its dealings with the Debtor," id. at 25. Lloyd Securities, then, stands for the proposition that clearing firms are duty-bound to follow sound business practices although the scope of that duty is largely measured by the breadth of the language employed in the firm's contracts.